Despite a booming stock price, Wayfair is no Amazon

  1. Supply chain costs are big barriers to profitability. E-commerce may work really well in the search and discovery piece of the furniture shopping process but it does very little when it comes to a big piece of the value chain, namely the cost of (and complications associated with) home delivery of big and bulky items. So far nobody has figured out how to have delivery trucks get from point A to point B much faster. Nobody has figured out how to get a sofa into a house and up a flight of stairs without two guys going along for the ride. Amazon has its own challenges in dealing with spiraling fulfillment costs. While Wayfair is investing a lot to build better supply chain capabilities there are many daunting fundamental challenges inherent to home furnishings that will not be easy to overcome.
  2. Product returns are a killer. As I’ve written about previously, returns & exchanges are a ticking time-bomb for retail as online shopping grows. It’s particularly bad in the furniture business. Not only does buyers’ remorse tend to be higher in the home furnishings category, but the nature of the product often means items are more prone to damage. So when a product needs to come back it can be hugely expensive to handle the reverse logistics and refurbishing and/or liquidation cost. Want some evidence that this is a growing concern? Wayfair’s first physical store is an outlet.
  3. And what’s the deal with gross margin? There was a lot of excitement about Wayfair getting to 24% gross margin. Need I remind everyone that better is not the same as good? This might be an acceptable margin for a retailer with a low cost structure like Walmart or Best Buy. For a brand like Wayfair that isn’t close to sufficient. A better comparison is Williams-Sonoma–and their margin is around 34%. As Wayfair grows they can develop further efficiencies. They can also shift their product mix and obtain lower product costs–yet they already have a very high penetration in private label. What this low margin suggests to me more than anything is that their pricing is consistently too low. That may help explain the rapid customer growth, but it is hardly a recipe for long-term profitability.

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